Gold and silver closed on Friday at their lowest levels in more than a month, part of a broad market sell-off that favored safe haven assets as hedge funds in futures markets were more inclined to take profits than add to long gold positions after the impressive summer run-up. Look for even lower prices for both metals in the week or two ahead since, absent an early-bailout request by Spain, there are no other obvious catalysts to push prices higher over the near-term.
But, the good news for precious metals investors is that, in the weeks ahead, institutional investors and central banks are sure to step in and make purchases to provide price support and, more importantly, the month of October will soon be over. Beginning in November, a plethora of positive market forces will develop that should push gold and silver prices sharply higher, the most important being renewed focus on the massive U.S. debt after the election.
For the week, the gold price fell 1.9 percent, from $1,754.30 an ounce to $1,720.50, and silver fell 4.2 percent, from $33.48 an ounce to $32.07. Gold is now up 9.8 percent for the year, down 10.5 percent from its high last summer, and silver is 15.1 percent higher in 2012, down 35.2 percent from its high 18 months ago.
After the big move higher that began in early-August amid a wave of money printing announcements by central banks - during which time the gold price jumped $200 an ounce and silver surged more than 25 percent - precious metals were due for a correction/consolidation and, lest there be any doubt about this developing earlier in the month, the events of the last week should have made clear that this is exactly what is now happening. Traders are booking profits and, after last week's dismal U.S. earnings reports that sent equity markets lower, plunging gold and silver prices should not have come as a real surprise.
As shown below, a negative short-term outlook was confirmed on Friday in Kitco's weekly gold survey in which more than half of the respondents said they think the recent selling will continue.
This collection of 24 bullion dealers, investment banks, futures traders, money managers, and technical analysts cited such things as the failed breakout above $1,800 an ounce for gold and bearish short-term momentum that began in mid-September for their views.
Aside from the very contrarian thinking that, if so many analysts think one thing maybe investors should do the opposite, there is little reason to think gold and silver prices will do anything but move lower in the weeks ahead and some analysts now predict we'll soon see gold prices back in the $1,600s with silver prices threatening the sub-$30 level.
Perhaps the best thing that long-term investors can do right now is stop watching websites like Kitco for the rest of the month and, maybe, they've already decided to do just that as precious metal ETF holdings and premiums were little changed during the recent sell-off. After dropping 7 tonnes from a record high last Monday, holdings at the SPRDR Gold Shares ETF (NYSEARCA:GLD) were steady for the rest of the week, actually adding 0.3 tonnes on Friday as the gold price plunged.
Meanwhile, holdings at the iShares Silver Trust ETF (NYSEARCA:SLV) fell by only 6 tonnes last week, dropping 24 tonnes on Tuesday then adding back 27 tonnes on Thursday, and the premium for the Sprott Physical Silver Trust (NYSEARCA:PSLV) remains near its recent highs at just below five percent.
Though even lower gold and silver prices are probably dead ahead, these ETF owners should soon be rewarded as November has been the very best month of the year for metal prices over the last decade as shown below.
More importantly, the combination of a bailout request from Spain and the start of bickering in Washington over the "fiscal cliff" that begins immediately after the election are sure to drive the trade-weighted dollar lower which should help to push gold and silver prices higher.
The monthly labor report on November 2nd is another potential catalyst for precious metals, however, given the odd job market data reported lately, it's impossible to predict what sort of impact this could have.
If the jobless rate jumps from 7.8 percent to back over 8 percent, gold and silver prices will surely jump higher in anticipation of more Federal Reserve largess, but, a move lower would have the opposite effect.
Gold demand in India and China remains relatively weak, however, based on the latest round of price predictions, investment banks don't seem to think this is going to be a major factor in how gold and silver prices end the year.
Last week, Danish investment bank Saxo Bank cited a weaker dollar as the driver for a possible new record high gold price in December above last year's $1,921 an ounce. Also pointing to a weaker U.S. currency along with the impact of recent central bank policy measures, analysts at HSBC said last week they expect the gold price to reach $1,900 before year-end and analysts at CIBC World Markets think the gold price will rise sharply during the last two months of the year, averaging $2,000 in 2013, up nearly 20 percent from the 2012 average of about $1,700.
Lastly, another billionaire has stepped forward to call gold a bubble, but not in the same way that others have. According to this report in Mining.com, at the Canaccord Global Resource Conference last week in Miami, investor/author Frank Giustra said that gold is the ultimate bubble:
I don't know when and I don't know how high. But gold is going a lot higher. Gold is the bubble of all bubbles. It's the mother of all bubbles. It's the bubble people will go to when they've exhausted all other bubbles.
Here's why: It is movable. It is easily transferable across borders in times of crisis. It's a currency. It's liquid. It's easily tradeable. I'm a fan of all hard assets, but particularly gold. It's the largest part of my portfolio and it will continue to be until this cycle is over.
That's some pretty good asset allocation advice if you ask me…
Disclosure: I am long GLD, SLV, PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also own gold and silver coins and bars.